Will the China boom go in a straight line?

June 25th, 2007

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Today, one of the common stories we hear is this: since China is an ascendant superpower, its demand for commodities will increase in the decades to come, and hence, the commodities super-cycle will have a lot more room to go for a very long time.

We agree with the generalities of this story. True, we believe that China still has plenty of room to grow and its demand for natural resources on planet Earth will have to increase in the decades to come.

However, the market always latches on to the generalities of a story and takes a simplistic projection of the story too far into the indefinite future. What do we mean by that? Put it simply, we do not believe that the rise of China will take on the path of a straight line. Instead, there will be ups and downs, booms and bust and progress and setbacks. Anytime when the path does not look like a straight line upwards and take a temporary dive, the market will flip to the other extreme of this story and project extreme pessimism into the indefinite future. In other words, the market always looks at one side of the boom and completely ignores the flip side. Is the current Chinese boom completely void of danger? Take a read at Flip side of the boom: China could face Japan-style debt crisis, analysts warn. Can China?s growth completely independent on the health of the US economy? We guess not.

As we wrote this article, this article came to our mind: China to pull the plug?.